Welcome Back, Wall Street. Now Pay Us Back.

By William D. Cohan

Feb. 10, 2017

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CreditCreditDoug Chayka

If only we had been clever enough to take Donald Trump neither literally nor seriously, we would have known that after vilifying Wall Street throughout his campaign, he would embrace it once he got to the Oval Office.

And, just like that, Wall Street is swarming the Trump administration and steering financial policy. On Feb. 3, Mr. Trump invited the members of his Strategy and Policy Forum to the White House. Stephen Schwarzman, the group’s chairman and the billionaire co-founder of the Blackstone Group, was seated at Mr. Trump’s right. Jamie Dimon, the chairman and chief executive of JPMorgan Chase, sat across from him. Mr. Trump said he expected to cut “a lot out of” the 2010 Dodd-Frank law that re-regulated Wall Street after the financial crisis.

“There’s nobody better to tell me about Dodd-Frank than Jamie,” Mr. Trump said, presumably meaning that there was nobody better to help him dismantle Dodd-Frank than Jamie.

That afternoon he signed an executive order signaling that among his “core principles” is his determination to repeal the law. Just off Mr. Trump’s left shoulder, beaming, was Gary Cohn, formerly the president of Goldman Sachs, now the director of the National Economic Council. Waiting in the wings were more Goldman alumni, including Stephen Bannon, Mr. Trump’s chief strategist, and Steven Mnuchin, his pick for Treasury secretary.

Now that Wall Street has been welcomed back to Washington, it should use its return to the corridors of power to repair its tarnished reputation and to restore public confidence in the markets. That’s the least Wall Street can do after exacerbating one of the worst financial crises in history and then carrying on as if nothing bad had transpired. Mr. Trump can help make this happen, but only if he trades the repeal of Dodd-Frank for a wholesale reform of how bankers, traders and executives are compensated on Wall Street. A new system that rewards prudent risk-taking and holds people personally and financially accountable for their actions is a prerequisite to restoring our faith in Wall Street.

It’s been a rough eight years in exile for the big banks. Barely three months into the job, President Obama told the chief executives of the nation’s most powerful banks that his administration was the only thing standing “between you and the pitchforks.” Later he said he did not get elected to help out “a bunch of fat-cat bankers.” There were well-deserved public floggings of bankers in Congress and in front of the Financial Crisis Inquiry Commission. And in July 2010, President Obama signed the Dodd-Frank law, a complex set of rules governing what bankers and traders could do to make money and the risks they could take, intended to prevent another financial crisis.

Dodd-Frank and other financial regulations adopted around the same time have made it much harder for Wall Street to do what it does best: provide much-needed capital to businesses that want it. They are often cited, correctly, as a big culprit behind what Lawrence Summers, the Harvard economist and former Treasury secretary, refers to as “secular stagnation,” an economy that is “stuck in neutral” and condemned to a mere 2 percent annual gross domestic product growth rate.

Meanwhile, Mr. Obama’s Justice Department forced the big firms — or more accurately their shareholders — to cough up more than $200 billion in fines as punishment for, among other things, the role the banks played in knowingly packaging shoddy mortgages into securities and then passing them off as AAA-rated investments. We were led to believe these exorbitant fines were the same as justice, but that’s not remotely true, especially since many of the facts about what happened were whitewashed as part of the settlements and no individual Wall Street bankers, traders or executives have been held responsible for their wrongdoing.

No surprise, Wall Street also became a convenient whipping boy for ambitious politicians like Senators Elizabeth Warren and Bernie Sanders. Their popularity increased exponentially as they fingered Wall Street. Even Hillary Clinton (to keep Mr. Sanders and Ms. Warren at bay) and Mr. Trump (to burnish what seemed to be his populist credentials) got in on the act. As a result, most people don’t know what to make of Wall Street anymore. The combination of silly regulation and relentless demagogy took its toll. The pendulum against Wall Street had swung too far.

And then suddenly it swung back. Since his election, Mr. Trump has laid out the red carpet for private-equity billionaires, hedge-fund moguls and Wall Street bankers. It’s about time we stopped flogging Wall Street, but we shouldn’t forgive it, either. These rich white men need to take advantage of their second chance to help the American economy get back on a more secure footing, one that works for everyone, not just for the elites.

Mr. Trump seems determined to gut most of Dodd-Frank. “I have so many people, friends of mine that have nice businesses, they can’t borrow money,” Mr. Trump said. “They just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.”

He’s got a point. Parts of the Obama-era regulations make sense and should be kept: for instance, demanding that big banks have more capital and less leverage; requiring that often-risky financial derivatives be traded on exchanges so that their pricing is more transparent; and ensuring that brokers have their customers’ best interests at heart when advising them on their retirement accounts — the fiduciary rule, which Mr. Trump is unfortunately likely to eliminate.

But many provisions are overly burdensome. According to the law firm Davis Polk, there are more than 22,000 pages of Dodd-Frank-related rules. — more pages than in 34 copies of “Moby Dick.” These days, nearly one out of every five Wall Street employees does nothing more than monitor what the other four do. One particularly nonsensical requirement penalizes big banks for trying to help clients buy and sell bonds without forcing them to pay a higher price (when they buy) or to receive a lower price (when they sell).

If Mr. Trump does even a portion of what he promised he would do — and he’ll need congressional approval to do much of anything — Wall Street will applaud, and smarter regulation will probably serve as a catalyst to get the economy humming again. But repealing the bad regulations, let alone the good ones like the fiduciary rule, will do nothing to rehabilitate Wall Street’s image or overcome the view that the markets are rigged against the average investor.

The 2008 financial crisis badly hurt Wall Street by removing all doubt that the people who work there are in it for themselves (and their fat paychecks) regardless of the consequences of their poor judgment on the rest of us. That perception must be changed if we want ordinary Americans to benefit from a functioning Wall Street.

So while Mr. Trump and his banker buddies whittle away at Dodd-Frank, they need to do something else as well: junk Wall Street’s compensation system, which continues to reward bankers for making big bets with other people’s money and does nothing to hold them accountable when the bets go bad. We need to replace this system with one that rewards people when they succeed but penalizes them when they fail.

To do this, the government could require that the leading executives at each big bank — the top 500 or so people — put their own assets on the line in the event of a bankruptcy filing, bailout or default. Creditors and shareholders would have what’s called a first lien against executives’ co-op apartments, Hamptons houses, art collections and bank accounts. This would go beyond a now doomed Dodd-Frank proposal to claw back bonuses. Only something like this would properly align risk and reward on Wall Street, and help to prevent the next financial crisis.

This is actually how Wall Street worked once upon a time, when it was just undercapitalized small firms in which partners invested their own hard-earned capital. They lived with a daily existential threat that they could lose everything because of a foolish trader or an unscrupulous banker. But this changed in 1970, when the brokerage firm Donaldson, Lufkin & Jenrette sold a portion of its stock to the public. One Wall Street firm after another followed, with the climax coming in May 1999, when Goldman Sachs went public. Virtually overnight, Goldman’s partners were worth tens, if not hundreds, of millions of dollars.

Wall Street was no longer gambling with its own money, but with the public’s. As a result, for the past 47 years, Wall Street has been rewarding its star performers for generating as much revenue as possible, without a particular concern for how it was done. The only wonder is why it took so long for the 2008 crisis to come along.

People are pretty simple. If you reward them to take big risks with other people’s money, that is exactly what they will do. So sure, Mr. Trump, go ahead and work to repeal what you don’t like about Dodd-Frank. Try to increase G.D.P. growth to 4 percent. Ratchet up the supply of high-paying jobs. Move millions of people out of poverty into the middle class. An untethered Wall Street will help make that possible.

But the repeal of burdensome regulations cannot be done in a vacuum. Wall Street must also be forced to change its compensation system to one where there is real accountability for the bad behavior of bankers, traders and executives. Accidents are inevitable. Wall Street needs — and wants — seatbelts and speed limits.

William D. Cohan is the author of the forthcoming “Why Wall Street Matters.”